The Key Issues of Montgomery Enterprises Inc and Ewing Oil Inc Cases - Assignment Example

Question one Part a. The company name in the case study is Ewing Oil Inc.The company business was taking place in Texas under Delaware General Corporation Law. The contributions will be made to the company at the time of start-up will be called the capital. The Ewing family controls 60% of its stock and the Barnes family owns 40%. The board of directors is comprised of seven members, five are members of the Ewing family and two are members of the Barnes family. The key issues Ewing Oil needed additional funds to carry it through temporary cash flow problem. There was good effort from both the stakeholders which meant that both the family members did try to raise money through outside sources. The company was not able to raise the needed cash or finance due to the bad fincancial posistion the company was in. It was in this background that Ewing directors proposed to make a secured loan of $1 million from their own funds to the corporation. The steps that were taken was making full disclosure to the board of all of the terms of the loan and the deed of trust, and after a valuation of the land that was to secure the loan and putting the issue for voting. The five Ewing directors voted in favor of the loan and the deed of trust and the two Barnes directors dissented and that meant a majority of five to two in favor of the loan and agreement. Full disclosure of all material facts was also made to the shareholders, and the shareholders voted 60% to 40% in favor of the loan transaction, the vote being divided along family lines. The directors and shareholders of the company had partcipated in voting in the right sprit and faith which was relevant for this case study. The term capital means contributions that have been made to the company and there is controlling ownership to the company. The certificate of incorporation of the company will have a clause that the business and affairs of this Ewing Oil Inc will be managed by or under the direction of a board of directors and any deviation from this process should be in the certificate. A majority of the total number of directors will make a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number and in this case all the seven members have been present.( “GENERAL CORPORATION LAW”) The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number and that means the majority of the voting that has taken place in this case stands true. The other facts of the case can be said as said in the General corporation law under Delaware “GENERAL CORPORATION LAW”, has stated that “The material facts as to the director's or officer's relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders” It has been known that Ewing family to make a secured loan of $1 million from their own funds to the corporation and this fact was disclosed to the board of directors and shareholders. The “GENERAL CORPORATION LAW”, states that “The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the shareholders” was the votes of the directors and the shareholders were made in good faith. There has been no evidence of breach of duty at any circumstance on the part of directors and that means the decision was taken in good stead. b) The new solution that has been proposed was that the mother of the two Ewing directors has proposed to give the money and the mother was not in the board of directors. There will be a case when there is no breach of duty. There should be no personal interest involved when loan is taken from the mother of two Ewing directors. For the loan to take place ,there should be complete giving of information to the directors and shareholders. There should be full disclosure of information and no personal interest involved when entering into contract with the mother of two Ewing directors. There should be an opportunity for shareholders to understand the reasons for the taking loan and stockholders will be deemed to be present in person and vote at such meeting and the purpose or purposes for which the meeting is called for will be understood by each shareholder. Question Two The issue that will be used will be oppressive conduct that can be directed against the minority right of the shareholders. There are many forms in the arrival of oppressive conduct and it can appear in many forms and in different factual situations.( Find Law) The oppressive conduct can be done in a manner when a minor stock holder or share holder will be terminated of all services from the company and they will be send away in such a way that the shares will be bought back at lower price .That can mean that there will not be any rights left for the shareholder. The key points of this case is like this Montgomery Enterprises, Inc. (“ME”) is a Nevada corporation founded and controlled by Edward Montgomery, who owns 70% of its outstanding stock, chairs the board of directors and runs its daily operations as the CEO. The minor shareholder Dharma was terminated and there was no role for economic participation and this can be said as a step against participation in management (Find Law) . Edward Montgomery holds more than 70% of the share, becoming the major shareholder, making that the dividend goes mainly to the Montgomery. For the past 20 years, ME have paid regular dividends on its stock based on the performance of the company. The rights between Edward Montgomery and Dharma will be determined by the Nevada corporate law (Find Law) A number of courts has defined the term oppression in terms of the fairness of the action that was taken by the majority, and that has meant courts has been using phrases like conduct that has been wrongful and harsh. (quoting Skierka v. Skierka Bros., Inc., 629 P.2d 214, 221 (Mont. 1981)).( Find Law) There are courts that has made reference to the fiduciary duties that has been existing between majority and minority shareholders, and there are courts that have found oppression based on the disappointment of the minority's reasonable expectations( Find Law). The main point that has to be checked is to understand the fiduciary duty that existed between Hollis and Hill. The case facts can be studied in detail to understand that they had agreed to begin a business together, and getting it incorporated under the name FFUSA. ( Find Law). The case of Hollis and Hill had seen that they had retained equal ownership in the corporation.They had become officers and directors and they were paid the salary of both the roles and they had to follow the obligations. The fiduciary relationship that had been developed between them was that like followed in Partnership Company and that had happened because there were t shareholders and there was management responsibility between them. It is in this background that whether there has been a fiduciary duty that has existed between Dharma and Montgomery and it has to be proved that there was treatment of shareholders as partners, the directors were not actually elected and there has been an analogy of oppressive acts that has been done by Montgomery. The shareholding style of the company that has been followed has been that ME board offers individual officers the opportunity to purchase stock in the company. However, there is no fixed policy with respect to when such opportunities might be offered, nor any established policy that such purchase of stock changes the officer’s at will status as an employee ME have fewer than 30 shareholders, all of whom work for the company or are related to Edward Montgomery. There are no public shares for the company. Looking at the above characteristics, the company that has been discussed can be termed as close corporation .The main reasons for this is that Small number of shareholders in the form of thirty, there is no market for shares as said as no public shares for the company; Owners will be participating in the management and this can be seen in this case as Edward Montgomery running the daily operations as CEO. The discussion will be revolving around controlling owners vs. minority owners and the controlling owners right can be considered to partners in a partnership, as the bulk of dividend will be going to main owner, and there is enough power to wind up the business but the rules of partnership will not be applying here. The case study has been in such a way the company in discussion is having the workers and relatives of the company as shareholders. There are two issues from this case in that Dharma has been earning money as employment and on three separate occasions Dharma took advantage of the opportunity to purchase stock from the company and accumulated 1,000 shares at an average price of $200 per share. When Dharma has been removed from service, Dharma has received all wages due to her, and the company offered to repurchase her ME shares. The offered price for the stock was $220 per share, which was the fair value of the stock based on an independent appraisal. The issue that has to be raised is whether employment in this company was the sole way of earning money for the Dharma and whether the termination of the job can lead to financial problems.The shares has been promised to be bought out at a higher price. It has been found in the Hill's alleged "oppressive" acts, that had included the reduction and eventual termination of job and salary, there was no clear financial information of the company, one of the office was terminated, there was termination of employment, and removal of benefits. These are the ways in which a company may take action against minority shareholder and will prevent judicial scrutiny under the business judgment rule.(“Find Law”). The general nature is that employees who are adversely affected such decisions taken by the company may not be interested in making claim of oppression, even if they are also shareholders of the corporation like Dharma. The classic business judgment decisions that have been taken in close corporations can have a substantial and adverse affect on the "minority's" interest as shareholder. The reason for abuse is mainly that the expectations of shareholders in closely held companies will be different from shareholders in public corporations. (“Find Law”). The possible differences can be said as Shareholders in a publicly held corporation usually will not be interested in going beyond the role of shareholder and they will be content as keeping as an investor. The shareholder in close corporation will be seeing the role as different as they would be more interested to expect privilege and power that has been with ownership. The earnings from close corporations will be coming in salary rather than in form of dividend. (“Find Law”). The main points that can get in support of Dharma Shareholders in close corporations owe each other a duty of utmost good faith and loyalty and it is in this background that Dharma has acted when she proposed mandatory yoga and transcendental meditation training for all senior management personnel. Moreover this act taken by a shareholder of the company that can be termed as minority need not be thought of as disruptive to its shareholder interests. (“Find Law”). The controlling shareholder namely Montgomery consistent with his fiduciary duty, has deprived a minority shareholder, Dharma of her interest as a shareholder by terminating the employment or salary. Dharma duty has been existing like between controlling and minority shareholders and that has been said to be like the duty that has been said to be existing between partners. (“Find Law”). The point that can go against Dharma is that the minority's shareholder Dharma interest was not injured, as the corporation redeemed shares at a fair price. (“Find Law”). The close corporation act will be putting fiduciary duty on Montgomery. (“Find Law”). When we compare this case with Hill and Hollis we can find that they entered the organization in order to participate personally in its management, and make money principally through salaries as officers. This is in stark contrast to the present case as Edward Montgomery was the CEO and Dharma was hired ten years ago as vice president in charge of social responsibility at ME. Dharma has been taken in as an employee and stock holder but can be considered as a minor stock holder when compared with Edward. (Find Law). Question Three A) The key points that has to be noted The shareholders of the company have been Sam owns 300 shares, Diane owns 300, Woody owns 200, and Carla owns 200. There are six directors on the board: Sam, Diane, Woody, Carla, Norm and Cliff. Sam is the president, Diane is the secretary, Carla is vice president in charge of customer relations, and Woody is chief bartender and finance officer. After proper notice is given, the Cheers’ board meets but only Sam, Diane and Woody are able to attend the meeting. After protracted discussion, the vote is 2-1 in favor of the transaction, with Diane dissenting. A majority of the total number of directors will make a quorum for the transaction of business unless the certificate of incorporation or the bylaws require a greater number and in this case three members of six members have been present. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors unless the certificate of incorporation or the bylaws shall require a vote of a greater number and that means the majority of the voting that has taken place in this case stands true. There has been no issue of proxy voting and that can mean that the directors have not breached the fiduciary duty to the shareholders.( "Delaware Legislature Addresses Shareholder Access and Adopts Other Important Corporate Governance Provisions") Moreover the shares will be publically traded and the right of appraisal will not work for Diane. The shares will be traded of surviving corporation and there will not be any right for appraisal. B) The key issues are like that Cheers authorized additional shares of its common stock in the amended certificate, and issued 2,000 more shares in a regional offering. The shareholders now consist of the original investors in Cheers, the original owners of CC who had received Cheers stock in the merger transaction, plus 20 new shareholders, each of the new shareholders owning 100 shares. The directors and the officers that has been in the corporation has been remained as same before the election. The main points was that All of the directors attended the meeting Sam reminded the board that Cheers had acquired the restaurant only three years ago for stock worth about $100,000 and now the offer was for $10 million, but Colcord wanted an acceptance within 3 business days. The voting was that Sam’s proposal carried five to one, Diane dissenting. The main points that has to be checked was whether Sam has been taking decision on personal interest, whether the shareholders has been given the fiduciary duty .The decision of taking over should be reviewed under the business judgment rule. The decision makers should have been acting under personal interest and that would have meant there could have been reviewing of decision. That could have been done under the entire fairness standard. The majority as per voting was approval of merger andtakeover.The decision that was taken in pursuit of legitimate corporate interest and had taken the decision in not keeping any personal interest on it. ("why corporations choose delaware")The decision should be taken keeping in mind the interest of the shareholders rather than personal interest. The damage or injury to the company cannot be proved. ("Delaware Legislature Addresses Shareholder Access and Adopts Other Important Corporate Governance Provisions) The liability of directors has to be understood in detail. Delaware corporation law states liability of directors has been limited and it has been seen that a corporation has been provided as indemnification to directors. There will not be a personal liability that had to be applied against directors who are not interested in attending the meeting .If the directors has been acting on self interest, there can be damage that can be inflicted against them. ("why corporations choose delaware",) The Delaware corporation law has stated that directors will be responsible for damage to breach of the duty of loyalty, conflict of interest and the act of omission will be a main liability issue.The Delaware corporation law states that there has been a fiduciary duty from the side of directors and that will be extended to corporation and shareholders. ( "why corporations choose delaware")There are situations under which the shareholder can induce the breach of fiduciary and that will be on the basis of derivative claim to the damage that has been caused to the corporation by the directors ("why corporations choose delaware") There will be change in the situation when the company becomes insolvent and in those circumstances the director will be having fiduciary duty to involve the creditors. The other situation will be when company starts becoming insolvent and there will be no change in the role of the directors when compared with fiduciary duty to the shareholders and corporation by asking for business judgment.( "why corporations choose Delaware") C) The key issues The directors had not understood that the image of the company was tarnished when the multiple red flags through the consultant were ignored. The Cheers’ board had never considered establishing and monitoring compliance with internal controls and procedures to assure the serving of wholesome food, and when Cheers first considered franchising the restaurant operation, one consultant did recommend such internal controls among many other recommendations and it was also ignored. The recommendations that outlined the serious health risks that result from lax procedures and recommended a comprehensive audit and review of food storage and preparation procedures was also ignored. There has been subprime reputation loss due to this and it has committed waste by ignoring the consultant’s recommendations. The breach of personal liability has been committed from the side of board of directors. (Ernest L. Folk, Rodman Ward, Edward P. Welch )Delaware law has no provision for bringing directors under the personal liability law for ignoring sound business judgment situations. It is a case of oversight claims and bad faith (Ernest L. Folk, Rodman Ward, Edward P. Welch) It can be proved that the directors had acted with self interest and knowledge when there has been termination of employee who has made the key recommendations and rejection of consultant’s recommendation. The company did not take steps to monitor the risk that was happening to the damage of the reputation of the company and that will be raised in court (Eric) and the company has breached the duty of loyalty by failing to act in good stead .The next big failing from the side of the company has been the failure of obligation to disclose. Question four a) The SMC had the opportunity of presenting the attempt of taking over in the form of proxy contest and that means SMC company will be taking the help of shareholders to take hold of the director board of Amore, Inc and take control of Amore, Inc.The SMC has tried to increase the board size by taking in four additional directors .Moreover there was an effort to increase the nominee size. The other way this could have been done has been was the tendering offer. That means there will be an attempt to buyout the shares by an amount that cannot be refused. This has been shown by the following statement that SMC sent a formal letter to the Amore board of directors indicating its willingness to acquire the company in a merger transaction for $20 per share.SMC was trying the proxy attempt when the tendering offer failed. B) The key issues SMC changed tactics and commenced soliciting proxies for Amore’s annual shareholders’ meeting scheduled for May 4, at which the two Class I directors were up for election. In addition to proposing two nominees for the Class I positions, SMC’s proxy statement included a takeover proposal to increase the size of the board by an additional four directors and to fill those positions with its nominees. As outlined in its initial proxy materials, SMC’s takeover proposal sought to expand the board from five members to nine. If SMC's two Class I directors were elected and its four proposed directors were also placed on the board, SMC would control a majority of the board. SMC announced its intention to renew its merger discussions with Amore if it achieved control of the board. The reaction of the shareholders were like these Informal shareholder response to SMC’s two Class I nominees was enthusiastic, but there was some resistance to giving SMC outright and immediate control by expanding the board. The reaction of the company Amore announced that the Amore board (1) had postponed the annual election date to June 15 because of some conflicts with the originally scheduled May meeting and also to allow more time for the board to communicate to shareholders its opposition to the SMC takeover proposal and its nominees, (2) had amended the bylaws, as permitted therein, to increase the size of the board to seven members (adding one position to Class II and one position to Class III ), and (3) had appointed, as permitted in the bylaws, two independent well-qualified individuals to fill the newly created directorships until the election dates (2010 and 2011) for their respective Classes. The main points that have been raised by Amore were that the board’s very concerned about the damage SMC could do to the corporation if SMC gains a foothold in the boardroom. We’ve built a world-wide reputation for integrity second to none in the competitive arena of on-line dating. It has been alleged a false step can bring down the reputation of the Amore company. The thing that had happened was that Amore waged an all-out media blitz ridiculing SMC’s expansion proposals and raising questions about the business experience of SMC’s management. At the rescheduled June 15 annual meeting, the two directors proposed by SMC were elected to serve as directors. The shareholders of Amore’s have not been approval of the takeover proposal of the SMC. Now the claims that the SMC can make The shareholders will be having the fundamental right to vote. (Jonathan R. Macey )The shareholders were not given the option for putting the vote on the prescribed time(Jonathan R. Macey) and the company Amore had used the one month of taking media attack on the claims made by SMC.It has been stated that Delaware corporation law that importance will be given to the shareholders rights. The key issue that SMC has to prove was that there was no proposed threat to the Amore business as stated by Amore and SMC will not be damaging the internet dating business as claimed by the Amore. SMC can raise the issue that the meeting date has been fixed as stated by Delaware corporate law and that meant there was change of one month which was violation of the agenda that had been planned earlier (Jonathan R. Macey). SMC can also raise the issue that there has been allegation of ethics against the company that has been raised by Amore company should use the business judgment rule when it took the claims against Amore company.SMC can also raise the issue of breach of duty of care and that means shareholders and directors role when it comes to takeover of the company. The SMC can also prove that Amore Company has not been correct when it decided to change the meeting date. Reference "Delaware Legislature Addresses Shareholder Access and Adopts Other Important Corporate Governance Provisions”, viewed on August 5,2009,retrieved from http://www.weil.com/files/Publication/06575a2c-3e0c-40f0-93a6-1b5461af18a6/Presentation/PublicationAttachment/1817497c-ab81-4b86-89bc-1c660f3e6a8c/Weil_Briefing_Corp_Gov_.pdf “GENERAL CORPORATION LAW”, viewed on August 5,2009,retrieved from http://delcode.delaware.gov/title8/c001/sc04/index.shtml Find Law, “Hill vs. Hollis”, retrieved from http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=5th&navby=case&no=9920725cv0#N_4_ on July 29,2009 "why corporations choose delaware",viewed on August 5 2009,retireved from http://corp.delaware.gov/whycorporations_web.pdf Ernest L. Folk, Rodman Ward, Edward P. Welch ,1998,"Delaware corporation law", Folk on the Delaware general corporation law: a commentary and analysis‎ ,pp.50-75. Jonathan R. Macey ,1999,"Shareholders right",Delaware corporation law,pp.125-145. Read More